The recent launch of Microsoft Kinect has come with lots of fanfare and positive buzz from reviewers wowed by the magic of the new motion-based control game system addition to the Xbox 360. But the full story behind Kinect isn't about the new game experiences it enables, though that's certainly important. It's how Kinect fits into Microsoft's long-term strategy to build the Xbox platform up as an entertainment hub -- particularly for online video -- to compete with the likes of Google TV, Apple TV and Roku for living room mind share.

"My mom doesn't know what a Google TV is," Microsoft spokesperson David Dennis told me during a Kinect demo, when I asked him if he was worried about how crowded the living room was getting with all the Internet-connected boxes out there. "We're still competing against game systems, but over the horizon, we are thinking about the others. But we have a foothold already, people know about Xbox."

The heart of Microsoft's strategy here lies in its Xbox Live network. Last fiscal year, Live's revenues topped $1 billion, according to Xbox chief operating officer Dennis Durkin, or more than 10% of the total revenue from Microsoft's Entertainment and Devices Division. There's much to suggest that video plays a big part in Xbox Live's revenues. Durkin himself said that sales of digital goods, like movies and TV shows, on Live had surpassed $600 million, and subscription-based revenues, for the first time.

But even within subscription revenues, we can see that online video is important to Live. Dennis told me that in the past, when Xbox players fired up their consoles, their most common "first use" would be to go and play a shooter game online. Now, that "first use" is instead going to Netflix or other services, underscoring a shift in usage patterns. Want another statistic? Last week, Microsoft put out an announcement saying that among its Live subscribers, 42% watched more than 30 hours of TV and movies a month. Across the entire user base of Xbox Live members, subscribers or not, at least 15% of the 1 billion hours users spend collectively on Live were watching online video.

So where does Kinect fit into this strategy? Two main points here. One, as successful as Xbox Live has been, it's largely been limited to an audience of hardcore gamers. Microsoft has seen the greener pastures of Nintendo Wii and wants to expand its user base to the families and mainstream consumers that the Wii has been a hit with. Kinect's motion-based games are reminiscent of Nintendo's motion-controlled sports, fitness and party games. The system has been explicitly been marketed towards non-gamers. And if Microsoft can convince that wider market segment to buy in to the Xbox platform through Kinect, it has something Nintendo doesn't: the lucrative Live network.

The second point: Kinect is not just a game system, but an entertainment and communication navigation system as well. Through the wave of your hand, you can browse through TV shows and movies, in Minority Report-like fashion. And Video Kinect makes video chat from the living room an easier and more accessible experience to users who are less tech-savvy, albeit one that can only connect you to other Kinect users of Windows Live Messenger users right now. It's no coincidence that Microsoft launched its ESPN channel on Xbox Live just days before Kinect's launch. Xbox scored an exclusive deal with ESPN to provide content from a library of more than 3,500 sporting events from ESPN3.

The interesting thing about the ESPN integration is what Microsoft is adding to it with Xbox and Kinect. For instance, you can set up voice chat with friends while watching a game. There's also a feature that prompts you to predict the winner while watching a game, and you can see prediction percentages for games across the Xbox Live network. This sounds like the augmented TV experience that Google TV and others are getting into. And Microsoft has hinted that this type of added functionality to online video viewing is just the beginning. There may come a time, for instance, when your Xbox Live avatar (donning your favorite team's jersey bought at the avatar clothing store) will be able to find all of your friends on the network who are also fans of that team and get together with their avatars for a virtual tailgate while watching a game on Live.

In the past, game console makers spent lots of money developing the next piece of killer hardware, and even would lose money on each console unit sold, expecting to make it back up in sales of games and accessories. That still looks like the model for Kinect, with one important change -- Microsoft looks like it's expecting to recoup its losses not just from games, but more and more from online video and other entertainment media, representing a large shift in strategy.